IAK - The Benefits Of Insurance Pricing Power
2023-03-29 03:06:00 ET
Summary
- We’re currently in an extraordinary environment for the P&C market.
- For the January 1, 2023 renewal, the market saw premiums increase 7% for insurance and as much as 50% for reinsurance.
- With a firmly entrenched hard market, we believe that the segment will continue to offer compelling top- and bottom-line opportunities.
By Mike Anderson
We believe current dynamics of robust demand, decreased competition and rising prices for P&C insurance offer an attractive investment opportunity.
Pricing power is a particularly valuable investment attribute, and we believe there is currently an exciting opportunity for investors to capture it within property and casualty (P&C) insurance.
We’re currently in an extraordinary environment for the P&C market, as a cycle of disasters, conflicts and disruptions has fostered robust demand for risk mitigation while losses have served to reduce insurers’ appetite for risk. The result has been strong pricing momentum that is well-above industry historical averages for commercial P&C lines. For the January 1, 2023 renewal, the market saw premiums increase 7% for insurance and as much as 50% for reinsurance. 1
So, what has been the impetus for this positive pricing trend (referred to as a “hard market”), what is the current opportunity and how long do we think it could last?
Natural disasters, cyberattacks, Russia’s invasion of Ukraine and a broad, rising risk of litigation have all contributed to substantial claims for exposed insurers, with the last five years averaging over $100 billion in catastrophic losses. 2 With losses two times the average of the previous five years, 3 many insurers—especially those that were overexposed or poorly capitalized—elected to exit those markets. With less insurance capital left in supply, and demand staying strong, remaining participants have been rewarded with decades-high price increases without signs of softening.
As to where we are in the current cycle and how much longer pricing can remain strongly favorable to insurers, unlike the last two major loss cycles after 9/11 and Hurricane Katrina, the lure of increased pricing power has thus far not resulted in a meaningful influx of new entrants or competitive capital. Whether this has been due to the rising cost of capital or concerns around the trajectory and/or sustainability of recent elevated loss trends, the net result has been for pricing to largely remain free of significant competitive pressure. We see no meaningful near-to-medium-term catalyst on the horizon that would change that dynamic. With a firmly entrenched hard market, we believe that the segment will continue to offer compelling top- and bottom-line opportunities from best-in-class insurers that have both available capital and the necessary underwriting expertise to leverage this pricing power and effectively navigate whatever challenges lie ahead.
1 CIAB, Bloomberg and Arthur Gallagher2, 3 Howden Group and CIAB
| This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. The firm, its employees and advisory accounts may hold positions of any companies discussed. Specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. © 2009-2023 Neuberger Berman Group LLC. All rights reserved. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
The Benefits Of Insurance Pricing Power